Canada’s aging labour force threatens COVID recovery and future prosperity

According to most projections, Canada’s labour force growth will continue to grow slowly for years, with gains entirely dependent on immigration as our population ages. However, as the pandemic has shown, projections about the future are inherently uncertain. Already, immigration fell sharply while mortality rose in 2020. The pandemic’s effect on the long-term course of labour force participation of all workers and the human capital formation (essentially, the development of skills that can increase productivity) of young people is unknown but likely to be negative.

Labour is a key input into economic growth. This is especially true in Canada, which has relied on rising labour inputs to partly compensate for its abysmal productivity performance in the past decade. So it’s worrying that Canada’s labour force growth is projected to slow in coming decades.

Indeed, the labour force of the future will be quite different from the past due to immigration and aging. Immigrants will account for all of Canada’s future population increase, and immigrants have historically chosen to settle in only a few large cities. Canada’s aging population has several implications. While many will retire, others will stay active but only on their own terms, including flexible hours and more part-time work and self-employment. This will make finding and keeping workers challenging for large employers, especially in the union-dominated public sector. The greater problem for our society is therefore more likely to be chronic labour shortages than mass unemployment caused by automation and technology.

However, as noted in a new study published by the Fraser Institute, a slowdown in labour force growth is not inevitable. Labour force growth accelerated between 1996 and 2006. At that time, severe labour shortages in parts of the country led employers to offer higher wages and recruit groups previously overlooked (such as the disabled and older workers), resulting in higher labour force growth and a more diverse workplace without government intervention. In western Canada at the peak of the oil boom in 2008, employers adopted a number of creative means to entice workers to join the labour force, delay retirement and work longer hours to supply the required labour. If future labour force growth does not meet requirements, employers may be just as creative in finding the labour input they need.

Nor does a slowdown in population or labour force growth automatically result in labour shortages. Many European countries, notably France and Italy, have seen a rapid aging of their populations in recent years yet unemployment remains high and there are few symptoms of a shortage of labour. Some countries including Japan, Russia and Poland have seen their population shrink outright without creating labour shortages. The same holds true in Canada for Quebec and the Maritime provinces where population aging is more advanced than in Ontario and western Canada. However, these countries and regions with rapidly aging populations have seen a slowdown in economic growth and problems with government budget deficits.

But again, labour force growth in not inevitable. And Canada can also influence other determinants of growth, namely the stock of capital and productivity.

On the capital front, several policies could help raise investment, including lowering effective tax rates, easing regulatory restrictions, promoting internal trade, encouraging more competition and business formation, and allowing resource developments (including pipelines) to proceed.

It’s even easier to improve productivity growth. A wide range of existing technologies have the potential to boost productivity including robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the “Internet of things,” advanced wireless technologies, 3D printing and driverless vehicles. The pandemic clearly accelerated the adoption of some technologies, especially those related to communications and online banking.

While the impact of technology on future labour demand may not be as negative as many fear, labour supply growth will likely continue its recent slowdown, which had been accelerated by the pandemic. The experience of other countries and provinces within Canada shows that slower population growth increases the difficulty of sustaining economic growth and containing government deficits. This makes it all the more important for Canada to adopt policies as soon as possible that stimulate business investment and boost productivity. Canada’s large firms and governments must be more creative and flexible in retaining older workers as long as possible while increasing the mobility that places younger workers in the best position to succeed in the future.